IP: Patent Office trials—A good way to deal with bad patents?

Even if they’ve never faced a patent infringement lawsuit filed in federal district court, virtually every inside counsel has had to deal with a letter containing notice of alleged patent infringement. Whether it’s the technology your company sells or the commonplace functionality of your company’s website, a variety of activities serve to create exposure to allegations of patent infringement. Although strong doubts may exist about the validity of the claimed patent, the costs and the uncertainty that go into proving that invalidity before a jury remain daunting.

The America Invents Act (AIA) has delivered a powerful tool to challenge patent validity in these situations and others like them. Through the creation of a new breed of trial-like proceeding in the U.S. Patent and Trademark Office (PTO), companies now have a relatively quick way to challenge questionable patents before a technically savvy decision maker and at a much lower cost than district court litigation. These new PTO trial proceedings include discovery, protective orders, expert depositions, motions and the application of the Federal Rules of Evidence at oral hearings before three-judge panels. It is a brave new world in the PTO, and if you are looking down the barrel of a “bad” patent—or if you are asserting patents that may be challenged—you need to know how things have changed.

As of Sept. 16, 2012, the PTO began accepting petitions for inter partes review (IPR) of any patent or covered business method (CBM). For patents filed after March 16, there will be a third available procedure for challenging patents on even broader grounds including prior use or sale—post grant review (PGR). Many differences exist between these procedures, and each has many advantages and disadvantages that require case-by-case consideration. Still, the speed and lower cost each offers when compared to court litigation requires that they become part of thinking in patent cases.

First, PTO trials change the equation on how a company can address allegations of patent infringement. Prior to the AIA, a company facing an allegation of patent infringement could either litigate, settle or file a reexamination in the PTO. Patent litigation usually takes several years and costs several million dollars to go through trial. Settling, especially on what seems to be a weak patent, never feels good. And reexamination has always had serious drawbacks. Ex parte reexamination generally offers the challenger only one chance to tell the patent office why the patent is invalid. After that, the patent owner can make his patent virtually bulletproof by sweet-talking the examiner though in-person interviews and doing as many filings as it takes to obtain an allowable patent supported by PTO-endorsed best prior art. In most cases, accused infringers would rather save their best prior art for litigation.

To address these limitations of ex parte re-examination, Congress created inter partes re-examination (IPRex), in 2000. This procedure has gained popularity—2011 saw 374 IPRex filings compared with the total combined 308 filings that took place in the prior eight years. IPRex had many drawbacks. Most significantly for the challenger, IPRex filings often languished in the PTO for many years. As a result, if you were sued for infringement and could not get the case stayed pending re-examination, it was nearly impossible to obtain a final determination of invalidity from the PTO before facing a jury trial.

Now, PTO trials or IPR have replaced IPRex. The advantages are clear. The first is speed. When a petition for IPR is filed, the PTO will decide whether to institute a “trial” within six months and then will make a final decision within 12 months after that. The near certainty of those 18 months to a final decision (appealable to the Federal Circuit) is a major advantage compared with endless litigation and/or the old IPRex.

The speed of the process also contributes to the second advantage: a greater ability to obtain a stay of concurrent litigation about the same patent. Stays provide a critical avenue for controlling or delaying litigation costs. Once seen as nearly automatic, courts had been granting stays with growing reluctance in recent years, especially in some districts such as the popular Eastern District of Texas. The interminable pendency of re-exams often served as the justification as judges face increased pressure to keep matters from languishing on their dockets. The promised speed of the new PTO trials has already resulted in an uptick in the number of stays being granted.

Courts have already begun to grant stays more liberally for another reason as well. PTO trials have broader estoppel ramifications than IPRex does. Once one of the trial procedures under IPR has been completed, the patent challenger cannot challenge the patent in court using any prior patents or publications that were raised or reasonably could have been raised with the PTO. Thus, courts feel more confident that the validity of the patent will be resolved in the PTO, making it worthwhile to stay the litigation.

The broader scope of the estoppel is certainly a downside for a patent challenger. This concern must be weighed, however, against the ultimate likelihood of success of prevailing by invalidating the patent. In court, patents are presumed valid, and can only be invalidated based on a showing of clear and convincing evidence to a jury. By contrast, in a PTO trial, there is no presumption of validity. Patents are given their broadest reasonable construction (making it easier to show invalidity), and the challenger must only meet the lower “more likely than not” standard to technically experienced decision makers. PTO trials are so new that the first final determinations are not expected until the end of 2013. Still, there is reason to suspect that the better venue for challenging a questionable patent will be in the PTO.

As with most aspects of patent disputes, the pros and cons of PTO trials get more and more complex the longer you look at them. For instance, the patent owner will still have the opportunity to amend the patent claims during the litigation in the PTO. If you have a great noninfringement position, do you really want to give the patent holder the chance to fix it? There are so many different strategic considerations that it is impossible to simply say that every patent infringement allegation should be met with a filing for IPR (or CBM or PGR). This much is clear however: PTO trials were created with the intent that the validity of patents will more often be litigated in the PTO instead of the courts. And unlike the wait-and-see approach the patent bar took toward inter partes re-examination when it was launched, companies are filing for IPR at a steady pace. The first four months saw 108 IPR filings—on pace for more than 400 a year. Clearly, many companies have already decided that litigating validity in the PTO is the way to go.

A detailed summary of the rules and procedures governing PTO trials can be found here.